Money market funds are generally considered low-risk investments, because they are designed to maintain a stable price per share. However, as with any investment, it is important to understand what risks do exist, and to factor that information into your investment decision.

Insurance

In almost all cases, deposits into money market funds are not insured against loss. Under certain unlikely conditions, money market funds can lose value. In such a scenario, loss of confidence in the fund would be likely to lead to massive withdrawals, similar to a run on a bank.

Inflation Risk

Money market funds are heavily exposed to inflation risk. Most investments that a money market fund might make with your deposits are short-term cash loans, either to corporations or governments. If inflation is high during the period of these loans, the amount of cash paid back by the corporation or government might have less buying power than the original deposit.

Opportunity Risk

Every dollar invested in a money market fund is a dollar not invested elsewhere. If the stock or bond markets have a good year, you might wish you had less of your cash tied up earning low returns in a money market fund.

Default Risk

"Default risk" is the chance that governments and corporations will be unable to pay the money they owe to your money market fund account. The default risk with money market funds is considered to be low, but not zero.

Expense Ratio

Money market funds charge a fee to cover their administrative costs. This fee will come directly out of your returns, so you should pay close attention to this figure when selecting a fund for investment.

RELATED TOPICS

ABOUT ANSWERBAG

Answerbag wants to provide a service to people looking for answers and a good conversation. Ask away and we will do our best to answer or find someone who can.We try to vet our answers to get you the most acurate answers.